Background on the FTC's Noncompete Ban
On April 23, 2024, the Federal Trade Commission (FTC) voted 3-2 to ban virtually all noncompete agreements on the basis that such agreements constitute "an unfair method of competition" under the Federal Trade Commission Act (the Act).1 The ban—which is currently set to take effect Sept. 4, 2024—will render preexisting noncompete agreements (except those involving senior executives) unenforceable as of the ban's effective date and will render any subsequent noncompete agreements (including for senior executives) violative of Section 5 of the Act. The FTC claims that the ban would impact approximately 30 million Americans and boost wages by $300 to $400 billion over the next 10 years.
It is, however, far from settled whether the ban will take effect at all.
Legal Challenges to the Ban
The ban was long-anticipated, and challengers pounced, with some of the first lawsuits filed in the Fifth Circuit, where nationwide injunctions have been upheld. Within hours of the FTC's vote, Ryan, LLC (Ryan), a tax services and software provider, filed a lawsuit in the Northern District of Texas challenging the ban. (Ryan, LLC v. Federal Trade Commission, Case No. 3:24-cv-00986.) The following day, the United States Chamber of Commerce and several other business groups filed a similar suit in the Eastern District of Texas. (Chamber of Commerce of the United States of America, et al. v. Federal Trade Commission, Case No. 6:24-cv-00148.) On April 25, a third lawsuit was filed by ATS Tree Services, LLC in the Eastern District of Pennsylvania. (ATS Tree Services, LLC v. Federal Trade Commission, et al., Case No. 2:24-cv-01743.) The three lawsuits assert similar challenges to the FTC ban.
The lawsuits first challenge the FTC's claimed authority to implement the ban under sections 5 and 6 of the Act. Regarding section 5 (which proscribes "unfair methods of competition"), the challengers argue: Congress has never empowered the FTC with general rulemaking authority regarding matters under Congress's own jurisdiction; the ban constitutes a vast departure from the history, precedent, and interpretation of section 5; and the ban fails to take into consideration evidence of the "procompetitive benefits" of noncompete agreements.
With regard to section 6 (authorizing the FTC to "make rules and regulations for the purposes of carrying out the provisions" of the Act), the challengers argue that section 6 empowers the Commission "only to develop internal rules to govern how it conducts investigations and carries out its functions, not to promulgate substantive rules that bind private parties and declare common business practices categorically unlawful." To that point, the FTC has admitted that it has never previously used its rulemaking authority to regulate noncompete agreements.
The challengers also argue that the FTC's implementation of the ban implicates the Major Questions Doctrine, a statutory interpretation principle that presumes that Congress does not delegate significant political or economic issues to executive agencies. The challengers have highlighted that the Supreme Court has repeatedly invoked the Major Questions Doctrine in recent years to reject administrative agencies' attempts, based on ambiguous statutory text, to take what are considered unprecedented actions with vast economic and political significance.
The challengers next argue that, to the extent either sections 5 or 6 of the Act grant substantive rulemaking authority to the FTC, that grant constitutes an unconstitutional delegation of legislative power. They also argue that the ban violates the Administrative Procedure Act because the FTC lacks any authority to issue retroactive regulations.
Finally, the challengers charge that the nationwide ban is arbitrary and capricious because the FTC failed to engage in "reasoned decision-making" and failed to consider alternative proposals. With regard to the former, the challengers argue that the implementation of this categorical ban constitutes a "choice to fundamentally remake the American economy" based on nothing more than a "deeply flawed cost-benefit analysis, which leans heavily on inconclusive, ungeneralized studies." They emphasize that the ban would retroactively invalidate 30 million employment contracts and preempt the regulatory regimes of at least 46 states while disregarding the substantial research showing the benefits of noncompete agreements (for instance, incentivizing research, development, and training of the workforce, preventing "free-riding" or gaining improper access to confidential competitive information, and encouraging collaborative and innovative work environments). Regarding the latter, the challengers argue the agency was required but failed to consider responsible alternatives, such as issuing a ban applicable only prospectively, excluding independent contractors, or exempting certain types of noncompete agreements.
Procedural Posturing
On May 3, 2024, Judge J. Campbell Barker suspended the Chamber of Commerce's case under the first-to-file doctrine because Ryan filed its challenge first and the two lawsuits seek the same relief. On May 9, Judge Ada Brown—to whom the Ryan case was assigned—granted the Chamber of Commerce's unopposed motion to intervene/join the Ryan lawsuit. Judge Brown has ordered that briefing be completed by June 12, with a decision to be issued no later than July 3.
On May 10, the Chamber moved to stay the ban's effective date and/or preliminarily enjoin the FTC's enforcement of the ban. Days later, nearly a dozen business associations filed a joint amicus brief supporting the parties' efforts to prevent the ban from taking effect.
What Comes Next
Some if not all of these challenges may prove successful. Indeed, one of these courts may grant a nationwide injunction against enforcement of the ban until its validity can be adjudicated given the breadth of the ban's impact (including, but not limited to, the substantial costs of employers' compliance with the ban's notification requirements and the confusion that would ensue if employees were told their noncompete agreements were no longer in effect only for the ban to later be found invalid). This conclusion is bolstered by the Fifth Circuit's recent decision in Restaurant Law Center v. United States Department of Labor, US, No. 22-50145, WL 3139900 (5th Cir. Apr. 28, 2023), where the Court held that the non-recoverable costs of complying with an ostensibly invalid regulation typically constitute irreparable harm for purposes of enjoining the regulation.
Regardless of the outcome of the pending lawsuits, we anticipate that the losing party(ies) will appeal the decision, and that such challenges will continue until this issue reaches the Supreme Court's doors (a process that could take upwards of 18 to 24 months, plus additional time for the Supreme Court to resolve the question). In the interim, employers should continue to follow the litigation to keep track of the potential enforceability of the final rule, any injunctions granted, and potential timing of resolution, and begin evaluating how they will comply with the rule should it become effective.
Footnote
1. See GT Alert, FTC Votes to Ban Noncompete Clauses Nationwide, April 24, 2024.
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